Concepts of Economics

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SLMtitle.png Unit 1 Basic Concepts of Economics


By Tasrun Jahan


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Chapter Outline

  1. Introduction
  2. Learning Objectives
  3. Nature and Scope of Economics
    1. Definition of economics
    2. Scope of economics
    3. Importance of the study of economics
    4. Microeconomics vs. Macroeconomics
  4. Basic economic problem
    1. Three problems of economic organization
    2. Economic system
  5. Let's Sum Up
  6. Key points
  7. Glossary
  8. Practice test




SLMinto.png Introduction

There is no end of people wants. When one or two wants is satisfied, more new wants are felt successively. But the means or resources are limited. People do not get sufficient resources which are needed to satisfy the unlimited wants. So the resources are always scarce in relation to the wants of the individuals, state or the government. Under this situation we have to choose the more urgent wants. Economics is an idea which make a relationship between scarce means and unlimited wants.
In this chapter our concern is with some basic preliminary concepts:(1) Importance or consequance of the study of economics(2) Subjectmatters of economics (3)The basic problem of a economy.



SLMobj.png Learning Objectives
After reading this chapter, you are expected to learn about:
  • Describe the nature of economics;
  • Distinguish between microeconomics & macroeconomics; and
  • State the basic problem of an economy.




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Nature and Scope of Economics


People are confronted with innumerable wants from the cradle to the grave. If one want is satisfied, other wants emerge in succession. To satisfy these wants people are engaged in different activities in the society. But the means are limited in relation to unlimited wants. So people are constantly striving to satisfy unlimited wants with limited means. The science of Economics has emerged as a discipline to discuss how people are engaged in different activities to earn money and how do they endeavor to satisfy unlimited wants with limited means. The knowledge of economics is indispensable to know about how best to solve the manifold economic problems by the proper utilization of resources in the society.

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Definition of economics


The English term ‘Economics’ is derived from the Greek word ‘Oikonomia’. Its meaning is ‘household management’. Economics was first read in ancient Greece. Aristotle, the Greek Philosopher termed Economics as a science of ‘household management’. But with the change of time and progress of civilization, the economic condition of man changes. As a result, an evolutionary change in the definition of Economics is noticed. Towards the end of the eighteenth century Adam Smith, the celebrated English Economist and the father of Economics, termed Economics as the ‘Science of Health’. According to him, “Economics is a science that enquires into the nature and causes of the wealth of nations”. In other words, how wealth is produced and how it is used, are the subject-matter of economics. In the subsequent period Alfred Marshall defined Economics by saying, ‘Economics is a study mankind in the ordinary business of life’. In other words, according to Marshall, Economics studies not only the wealth but also the activities centering the wealth. In modern times more realistic definitions have been given to economics. In social life human wants are unlimited, but the means to satisfy those wants are scarce. Economics studies how to use the limited resources to satisfy the unlimited wants of men. In the words of Lionel Robins, the modern economist, ‘Economics is a science which studies human behavior as relationship between ends and scarce means which have alternatives uses’. So, Economics as a social science studies how people perform economic activities and how they try to satisfy unlimited wants by the proper use of limited resources. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.


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Scope of economics



Economics is a social science. The subject matter of economics deals with the analysis of economic problems of people in the society and the satisfaction of their wants. With the evolutionary changes of the society and its civilization, the subject matter scope of economics has expanded.Scope of economics is discussed below:

  1. As social science economics deals with the economic activities of human being. One person day to day money earning and money spending activities constitute the subject matter of economics. For example, parents’ affection and nursing service for their children are not the subject matter of economics.
  2. Resources are needed to satisfy people's wants. So, the availability of resources and their use are important subject matter of economics. Adam Smith has termed economics as the “Science of Wealth”.
  3. People's wants are unlimited. But the resources to satisfy the wants are scarce. Economics discusses how men can get the maximum satisfaction by using the scarce means to satisfy wants on the basis of priority. So, as subject matter of economics, the scarcity of resources is considered very important.
  4. People's wants are related to production, exchange, distribution and consumption. Again, currency, banking system, public finance, trade etc is also parts of economic activities. Economics discuss these issues also. Besides, how economic development of the country is achieved through the means of economic planning is also included in the subject matter of economics.
  5. Economics discusses the economic problems and economic activities and indicates proper solution to these problems. Economics also discuses about the value judgment of human actions and behavior.
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Importance of the study of economics


In modern times the importance of the study of economics is infinite. It is not only provides us knowledge, but also helps to solve the different problems in real life. The importance of economics in different areas of human life is discussed below:

In the daily life of people: People are confronted with manifold wants in their daily life. But the resources to satisfy those wants are limited. By studying economics we can know the use of limited resources to satisfy alternative wants on the basis of priority.

In the proper use of resources: We can learn about the use of resources with the knowledge of economics. Study of economics helps us to understand about how to produce the maximum output by the proper use of limited resources.

In state management: The knowledge of economics is indispensable to manage the economic and development activities of a state. For this reason the politicians and the govt. officers need to have proper knowledge of the currency system, banking system, tax system, industrial and trade policy, budgeting etc. The knowledge of economics helps in managing the state affairs.

To social workers: Economic causes lie at the roots of maximum social problems. The social workers need to have knowledge of economics to diagnose and solve the problems of poverty, unemployment, illiteracy, excessive growth of population, lack of housing and medical facilities etc.

To the labor leaders: The leaders of the workers should have the knowledge of economics for improving their bargaining capacity in respect of the formation of trade unions, the increase of wage and other benefits, the improvement of their working conditions etc. In economic planning: It is necessary to have sound knowledge of the economic problems and the available resources for the formulation and implementation of economic plans for the country. For this reason the knowledge of economics is indispensable.

Acquisition of knowledge of international issues: The knowledge of economics is necessary to know and understand the socio economic events of different countries, international relationship, commerce etc.


SLMact.gif Activity
Discuss about the neccessity of economics in your daily life with your mother.


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Microeconomics Vs. Macroeconomics


Economic analysis is divided into two main branches: microeconomics and macroeconomics. These two branches are important for scarcity problem.
Greek word Micro means ‘small’. Microeconomics is the study of decisions of people and business and the interaction of those decisions in markets. The goal of microeconomics is to explain the prices and quantities of individual goods and services. Microeconomics also studies the effects of government regulation and taxes on the prices and quantities of individual goods and services.

Example:

Microeconomics studies the factors that determine the prices and quantities of a product (say cement) of cement factory.

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On the other hand, Macro means ‘big’. Macroeconomics is the study of the national Economy as well as global Economy and the way that a Economic system work. The goal of macroeconomics is to explain general price level, national income, employment, production. Macroeconomics also studies the effects of Government actions-taxes, spending and the deficit –on total incomes and price level.

Example:

Macroeconomics studies the forces that determine the average cost of living , the total value of production in a country.

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SLMact.gif Activity
Classify the following topics as relating to Microeconomics or Macroeconomics.

a) A family’s decision about how much income to save.
b) The effect of government tax on import.
c) The impact of national savings on economic growth.
d) A firm’s decision about how many workers to hire.



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Basic economic problem


In the previous section we have learned about the scarce means of a economy and the unlimited wants of people.Because an economy’s production is limited by its resources and technological knowledge, every society, no matter how rich or poor, makes choices; between health care and yachts, between highways and tanks, between education and restaurant meals.That means every society must have a way of determining what goods are produced, how these goods are made, and for whom these goods are produced.

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The three problems of economic organization


Every society must have to determine what goods are produced, how these goods are made, and for whom these goods are produced. These three fundamental questions of economic organization- what,how and for whom are as crucial today as they were at the dawn of human civilization. Now we know details about them.
What goods are produced and in what quantities? A society must determine how much of each of the many possible goods and services it will make, and when they will be produced. Will we produce paddy or jute in our field? A few high-breed paddy or much more local paddy will be produced? will we use scarce resources to produce manu consumption goods? will we produce fewer consumption goods and more investment goods. Every society has to face this type of questions or problem. We may call this problem as problem of choice.
How are goods produced? A society must determine who will do the production,with what resources, and and what production techniques they will use.Is electricity genereted from natural gas, coal, or solar power. These problem is called to be technological problem.
For whom are goods produced? One key task for an society is to decide who gets to eat the fruit of the economic efforts. Or, how is the national product divided among different households? Are many people poor or rich? Do high incomes go to teacher, doctor, businessman or landlords? These type of problem is called to be problem of distribution.

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Proper Utilization of Resources


In every society the resources are scarce in relation to demand. The scarce resources should be utilized in such a way as to maximize the welfare of the society. In production, resources should be employed in such a way that they give maximum output at a minimum cost. This is called the proper utilization of resources. Proper utilization of resources is neccessary for solving the economic problems of the society. Even in personal life, scarce resources should be used for meeting the neccessaries of high priority in order to get the highest satisfaction.

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Economic System


One key task for Economics is to study & explain the different ways that a society can answer the questions what,how and for whom. Different societies are organised through alternative economic systems and econmic studies the different machanasim that a society can use to allocate its scarce resources. Different type of Economic systems prevail in different countries of the world. They are:1.market economy 2.command economy 3.mixed economy.
Market Economy: A market economy is one in which indivuals and private firms make the major decessions about production and consumption. In this market consumer are soverein. Firms produce the commodity that yield the highest profit. From here you can get answer of the question what. Firms use the techniques of production which are least costly.From here you can get answer of the question how. Consumption is determined by individuals'decisions about how to spend the wages and property ownership. We get the answer of question for whom.Like United States most of the democratic coutries, most economic questions are solved by the market.

Example:

In the united State of America most economic questions are solved by the market. Hence their economic system can be treated as Market Economy.

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Command Economy: A command is one in which the government makes all decisions about production and distribution. Soviet Union during most of this century, the government owns most of the means of production (land and capitl);it also owns and directs the operations of enterprise in most industries; it is the employer of most workers and tells them how to do thier jobs; and the governmentin a command economy decides how the output of the society is tobe divided among different goods and services. In this economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions.

Example:

During the most of the 20th century Soviet Union is operated by Command Economy.

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Mixed Economy:In recent time no contemporary society falls completely into either market economy or command economy. Rather all exeption of two or three societies are mixed economies with element of market and command. Like market economy, here the private ownership of property, earning of profit and individual initiativa prevail. But, there is also govt. control over the economic activities at the private level.Besides, some large scale and basic industries and important commercial venture are run in the public sector.

Example:

Though most decisions in the USA,UK and Japan are made in the marketplace but the government plays an important role in modifying the functioning of the market.Mixed Economy also exsists in Bangladesh where both market and government plays role simultaneously in production, distribution, consumption etc.

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SLMsaq.gif Self-Assessment Questions (SAQs) - 1
Multiple Choice Questions

1. Pepole's want is-
(a) more
(b) limited
(c) unlimited
(d) few

2. The subject matter of economics is-
(a) to ensure economic progress of the people
(b) to run business
(c) to try to satisfy unlimited wants with limited means
(d) too mobilize resources and to use them

3.Under command economic activities are guided by
(a) the automatic price system
(b) govt. planning
(c) the freedom of consumers
(d) competition




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SLMkp.png Key Points

The key points of this chapter are as follows:

  • Economics
  • Economic System
  • Employment
  • Macroeconomics
  • Market economy
  • Microeconomics
  • Mixed economy





SLMgloss1.png Glossary


Market Economy: an economy in which- what, how and for whom these questions concerning resource allocation are primarily determined by supply and demand in markets.
Price Level: an indicator of how high or low prices are in agiven year compared to prices in a certain base period.
Scarcity: the limited nature of society's resources.
What, How and for Whom: the three fundamental problems of economic organization.




SLMtest1.png Practice Test


Short type question
1. What is economics?
2. What is scarcity?
3. Why we read economics?
4. Define mixed economy?

Essay type question
1. What is the difference between Microeconomics & Macroeconomics?
2. What are the basic economic problem? Describe them.
3. Explain the economic system.




SLMfeedb.png Answers to SAQs

Answers
1.(c)
2.(c)
3.(b)





SLMref.png References and Further Readings


  1. Economics,18th Edition, Paul a. Samuelson and William D. Nordhaus, McGraw Hill Book Co. New york, 2001.
  2. Microeconomics, 4th Edition, David N. Hyman, McGraw-Hill Companies, Inc., 1989.